Federal Reserve Releases Bank 'Stress Test'

The Federal Reserve has released the results of its much-anticipated stress test of the nation's biggest banks. The Fed says most of the nation's 19 biggest financial institutions passed the tests, although four did not. To find out what this means, we turn to NPR's Jim Zarroli. Jim, first, why is the Fed running stress tests? What are they supposed to show about the banks?

JIM ZARROLI, BYLINE: You know, it's a kind of a report card. It's like a checkup. Obviously the banking sector has faced a lot of problems over the past few years - you know, bad loans, you've had the debt problems in Europe. So, there are just a lot of questions out there about how well the banks are doing. The Federal Reserve regulates part of the banking industry, so, I think this is just the Fed's way of, you know, trying to shed some light on the health of the banking business.

BLOCK: And how do the tests work? What stresses are they supposed to show?

ZARROLI: Well, what they do is the Fed takes the, sort of the banks' financial statements and runs them through computer models and the models are supposed to show what would happen if the economy suddenly took a real turn for the worse. In other words, what if the unemployment rate, which is now 8.3 percent, what if it shot up to 13 percent? What if housing prices fell another 21 percent? What if stock prices fell 50 percent?

And the tests indicate that most of these banks, most of the 19 would do okay. They would have enough capital on hand, which is the important thing you have to look at when you're trying to analyze banks.

BLOCK: The Fed did name names, though, Jim, right, in terms of the banks that did not pass those tests?

ZARROLI: Yes, it did. And the four are Sun Trust, Ally Financial – which is an NPR underwriter – CitiGroup and MetLife. Each of them failed at least one part of the test. In the case of Citigroup, which is, you know, an enormous bank, it just barely failed. Its capital levels were just a hair under what they were supposed to be. Among the others, MetLife has said, you know, we're not really a bank, so don't judge us like one. But these are the four that failed at least some part of the tests.

BLOCK: And what's the effect of that for the banks that did fail?

ZARROLI: Well, I think probably you're going to see analysts trying to take apart these – the results and sort of understand why they failed. You know, in the case of some of them, it's not really a surprise. But I think it's something that's going to hurt their share price and make investors a little bit more skeptical about their performance going forward.

BLOCK: And the banks that passed?

ZARROLI: Well, that – it has a very practical effects because it means that they can increase their dividend and they can also buy back their own shares. These are things that always cause stock prices to go up, so it should do that again. In fact, the interesting thing was, the Fed wasn't going to release these stress test results until Thursday, but then, today, JP Morgan Chase came out and issued a press release saying it had passed the tests and its stock price just shot up. And because they jumped the gun, the Fed had to come out and release the other results, too, after the market closed. So you can expect a lot of financial stocks to do even better tomorrow.

BLOCK: And, Jim, overall, what do you think the results say about how the US banking sector has recovered from the financial crisis?

ZARROLI: Well, as I said, you know, there have been a lot of questions about the banks – about the continuing housing problems, the bad loans on their books, also about the effect of the problems in Europe. So, I think there's a lot – still just a lot of questions about the sector. I think this is just a mark of confidence. It just sort of sends a message from the Fed that banks in general are, you know, holding on and even doing well in some cases.